Good morning, and welcome to the Ingersoll Rand Q4 2023 Earnings Call. Please note that this call is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I will now turn the call over to Matthew Fort, Vice President of Investor Relations. You may begin your conference.

Thank you and welcome to the Ingersoll Rand 2023 fourth quarter earnings call. I'm Matthew Fort, Vice President of Investor Relations. And joining me this morning are Vicente Reynal, Chairman and CEO; and Vik Kini, Chief Financial Officer. We issued our earnings release and presentation yesterday afternoon, and we will reference these during the call, both are available on the Investor Relations section of our website. In addition, a replay of this conference call will be available later today. Before we start, I want to remind everyone that certain statements on this call are forward-looking in nature and are subject to the risks and uncertainties discussed in our previous SEC filings, which you should read in conjunction with the information provided on this call. Please review the forward-looking statements on Slide 2 for more details. In addition, in today's remarks, we will refer to certain non-GAAP financial measures. You can find a reconciliation of these measures to the most comparable measure calculated and presented in accordance with GAAP in our slide presentation and in our earnings release, both of which are available on the Investor Relations section of our website. On today's call, we will review our company and segment financial highlights and provide full year 2024 guidance. For today's Q&A session, we ask that each caller keep to one question and one follow-up to allow time for other participants. At this time, I will turn the call over to Vicente.

Thanks, Matthew, and good morning to all. I would like to begin by acknowledging and thanking our employees for their hard work in helping us deliver another record year in 2023. We finished the year on a high note with strong fourth quarter and full year results, despite the constantly changing macroeconomic environment. Our 2023 performance reinforces the impact our employee ownership mindset has for Ingersoll Rand. I would also like to welcome our new employees from our recent acquisition of Friulair, whom I had the chance to visit last week in Italy. I was very impressed by the entrepreneurial and technological spirit that has made this company grow at an impressive organic CAGR of 15% over the past three years. Starting on Slide 3, in 2023, we demonstrated again how we continue to outperform against our long-term Investor Day commitments with double-digits growth in revenue, adjusted EBITDA, adjusted EPS and free cash flow. As we move to 2024, demand remains solid. And while macroeconomic and geopolitical uncertainties continue to be at the top of everyone's mind, we remain agile and focus on what we can control. IRX is our competitive differentiator, and combined with our ownership model, we remain confident in our ability to execute on our commitments. We recently held our Investor Day this past November, and I'd like to spend a few minutes providing a couple of important highlights that we presented. On Slide 4, we highlighted how we deliver compounding results through our economic growth engine. With the use of IRX, we have created an increasingly durable financial profile underpinned by our employee ownership model. Since 2016, we have transformed the company into a premier growth compounder. We have reduced the cyclicality through divesting our club car and HBS businesses and reinvested approximately $2.3 billion into accretive acquisitions focused on high growth sustainable end markets. Today, our balance sheet is stronger than ever and we enter 2024 well positioned to build upon our progress to date. Moving to the next page, we show how we are uniquely positioned to grow market share within the $55 billion of highly fragmented addressable markets we currently play. The combination of our product portfolio, multi-channel, multi-brand strategy, massive install base and unmatched commercial and operational footprint provides an exceptional foundation for continued market share growth, both organically and inorganically. On Slide 6, we demonstrate how we remain committed to delivering financial performance while also doing good for the planet and our community. On the left-hand side of the page, we have some very exciting news to share. S&P Global recently announced that Ingersoll Rand ranked first in the world within our industry, up from number two in the prior year. Also, Ingersoll Rand was named to the A list for its performance in tackling climate change and commitment to global environmental leadership by CDP. CDP's annual environmental disclosure and scoring process is globally recognized as the gold standard for corporate transparency. Finally, as shown on the right-hand side of the page, we continue to make progress towards our aggressive 2030 goals, and we're already well on our way to achieve them. On Slide 7, we show the catalyst for the progress, which is a highly engaged employee base combined with an ownership mindset. And as shown on the left-hand side of the page, our employee satisfaction is over 600 basis points higher than the industry average. We believe our employee ownership model drives the increased employee engagement and as illustrated on the center of the page, we have created a massive economic opportunity for our employees and their families. That has been life-changing for many, as expressed on the quotes from some of them. All of these lead us to the next slide, where you can see that the combination of all these factors, executed through our economic growth engine, is evidence that our model provides durable long-term performance. Our portfolio is positioned to capitalize on global mega trends such as sustainability, digitalization and quality of life. We expect to leverage our organic growth enablers to deliver on average mid single-digit organic growth through 2027. As you can see, we outperformed this commitment again in 2023, delivering 10% year-over-year organic revenue growth. In 2023, we also delivered 6% in year growth from M&A. The combined organic and inorganic growth of 16% also surpassed our low double-digit growth commitment, and not only did we surpass our growth targets, but we also exceeded our margin expansion initiatives, generating 170 basis points of adjusted EBITDA margin expansion, and again, surpassing our long-term targets for this metric. With IRX as our competitive differentiator and over 400 impact daily management sessions or IDMS across our company each week, our high-performance culture encourages a strong focus on execution. In 2023, we delivered adjusted EPS growth of 25% and a free cash flow margin of 18%. These results prove that we are a premier durable growth compounder. On Slide 9, to date, we're on track or ahead of schedule in delivering the 2025 targets set at our previous Investor Day. We have set new aggressive targets for 2027 long-term financial, and our results give us confidence in delivering those targets that are on average over the cycle. Turning to Slide 10, M&A continues to be at the forefront of our capital allocation strategy. We invested over $450 million across 13 acquisitions in 2023. These acquisitions have been both market-leading products and technologies while accelerating our addressable market with close adjacencies. As of today, we currently have 10 transactions under LOI. Our M&A funnel remains strong and continues to be over 5x larger than it was at the time of the RMP. We expect an additional 400 to 500 basis points of annualized inorganic revenue to be acquired in 2024. The 10 transactions currently under LOI are similar in size and nature to the Bolton deals we have done over the past few years. However, outside of these 10 LOIs, we still have a couple of deals in the funnel where the purchase price exceeds $1 billion. I will now turn the presentation over to Vik to provide an update on our Q4 and full year 2023 financial performance.

Thanks Vicente. On Slide 11, we finished the year strong in Q4 through a balance of commercial and operational execution fueled by IRX despite the constantly changing macroeconomic environment. Total company organic orders and revenue increased 3% and 4% year-over-year respectively. We remain encouraged by the strength of our backlog, which is up over 8% year-over-year. This provides us with a healthy backlog to execute on entry in 2024 and gives us conviction in delivering our full year 2024 revenue guidance. The company delivered fourth quarter adjusted EBITDA of $501 million, a 19% year-over-year improvement, and adjusted EBITDA margins of 27.5%, a 160-basis point year-over-year improvement and a hundred basis point improvements sequentially from Q3. Free cash flow for the quarter was $552 million and for the year we delivered nearly $1.3 billion of free cash flow with an 18% free cash flow margin and 105% conversion to adjusted net income. Total liquidity of $3.6 billion at quarter end was up approximately $400 million sequentially. Our net leverage continues to improve both year-over-year and sequentially. At 0.6 turns, we are 0.2 turns better than the prior year and 0.3 turns better than the prior quarter. Turning to Slide 12 for the total company on an FX adjusted basis, Q4 orders and revenue both grew 11%. Total company adjusted EBITDA increased 19% from the prior year. The ITS segment margin increased 260 basis points, while the PST segment margin was flat year-over-year, and corporate costs came in at $47 million for the quarter. Finally, adjusted EPS for the quarter was up 19% to $0.86 per share. The adjusted tax rate for the quarter was 20.7% with the full year adjusted rate finishing slightly above 22%. On Slide 13, total company full-year orders grew 8% and revenue increased 17%, both on an FX adjusted basis. Total company adjusted EBITDA increased 25% from the prior year. The ITS segment margin increased 240 basis points, while the PST segment margin increased 130 basis points. Corporate costs finished the year at $173 million, driven by continued investments to support growth in areas like demand generation and IIoT as well as the impact of incentive compensation adjustments. Lastly, adjusted EPS for the year was up 25% to $2.96 per share. Moving on to the next slide. Free cash flow for the quarter was $552 million, including CapEx, which totaled $30 million. Total liquidity now stands at $3.6 billion based on approximately $1.6 billion of cash and $2 billion of availability on our revolving credit facility. Leverage for the quarter was 0.6 turns, which was a 0.2 turn improvement year-over-year. In 2023, we returned $295 million to shareholders through share repurchases and dividends. Specifically within the quarter, cash outflows included $130 million in share repurchases, $39 million deployed to M&A, and $8 million for our dividend payment. M&A remains our top priority for capital allocation and we continue to expect M&A to be our primary use of cash, as we look ahead. I will now turn the call back to Vicente to discuss our segments.

Thanks, Vik. On Slide 15, our Industrial Technologies and Service segment delivered solid year-over-year organic revenue growth of 5%. Adjusted EBITDA increased 26% year-over-year with an adjusted EBITDA margin of 30%, up 260 basis points from prior year with an incremental margin of 48%. We also delivered sequential margin expansion of 120 basis points from Q3 to Q4. It is important to note that we have already achieved our 2025 high 20s adjusted EBITDA margin target for ITS, which is a full two years ahead of schedule. We continue to see solid demand for our products with organic orders also up 5%. Moving to the product line highlights. Compressors were up low double-digits in orders and up mid-single-digits in revenue. Industrial vacuum and blower were down low double-digits in orders, but up low double-digits in revenue. The order decline was mainly driven by prudently de-booking an order from an electric truck manufacturer in Europe that had some battery supply issues. However, the prospects are starting to look better for this manufacturer in 2024. Also, it is important to highlight that core product lines continue to show strong momentum on a two-year stack, excluding FX and also excluding the recent acquisitions of SPX Air Treatment and Roots’ blower. On a two-year stack, compressor orders were up mid-teens and revenue was up high 20s. Industrial vacuum and blower orders were up low double-digits and revenue was up mid-30s. As a reminder for additional detailed information on product lines and regional splits, we have moved the chart, which was previously included on this page to Slide 21 in the appendix. For our innovation in action section, we're highlighting a new compressor with advanced two-stage technology. This product is a great example of how Ingersoll Rand is providing an innovative digitally-enabled sustainable solution with a 17% energy efficiency improvement versus the competition. Turning to Slide 16. Organic revenue in the Precision and Science Technology segment was approximately flat year-over-year. The PST team delivered adjusted EBITDA of $94 million, which was up approximately 2% year-over-year with a margin of 30.1%. Organic orders were down 1.6%, driven by the life science businesses. We see organic orders growth stabilizing, and we remain positive about the underlying health of the PST business. In fact, PST excluding the life science businesses has seen positive organic orders and revenue growth in 11 out of the last 12 quarters. In addition, short cycle orders in the industrial businesses were up mid-single digits in Q4. Overall, the PST segment remains on track to meet our long-term Investor Day growth commitments. For our PST innovation in action, we're highlighting our ARO piston pump system. This is a perfect example of leveraging both I2V and demand generation to pivot an existing product line into a high growth sustainable end market. Over the past 12 months, we have already taken $7 million in orders with a leading OEM solar panel producer, which has the potential for $1 million in annualized after-market revenue. As we move to Page 17, we're introducing our 2024 guidance. Total company revenue is expected to grow between 5% to 7% with the first half growth of 4% to 6% and the second half growth of 6% to 8%. We anticipate organic growth of 2% to 4%, where price is approximately 2/3 and volume 1/3. FX is expected to contribute approximately 1% of tailwind for the year, of which the impact will be realized relatively evenly throughout the year. M&A is projected at $160 million, which reflects all completed and closed M&A transactions in 2023, as well as the acquisition of Friulair. Corporate costs are planned at $160 million and are expected to be incurred evenly per quarter throughout the year. Total adjusted EBITDA for the company is expected to be in the range of $1.915 billion and $1.975 billion. At the bottom of the table, adjusted EPS is projected to fall within the range of $3.14 and $3.24, which is approximately up 8% at the midpoint. We anticipate the adjusted tax rate to be roughly 23%, gross interest expenses to be about $155 million, and CapEx to be around 2% of revenue. On the right-hand side of the page, we have included a 2024 full year guidance bridge showing the growth associated with both operational activity and the impact associated with corporate cost, interest income and expenses, FX, share count, and changes in the adjusted tax rate. Based on the above guidance, adjusted EPS growth is expected to be 6% to 9%. As we sit here in mid-February, we would like to provide some commentary on Q1. We expect our normal seasonality to return in 2024 from a revenue perspective, which means that Q1 will be the lowest revenue quarter of the year. In addition, as a reminder, Q1 has a very tough comp as we delivered 20% organic revenue growth in Q1 of 2023. As a result, we anticipate organic revenue growth to be flattish to slightly up for the quarter with continued year-over-year margin expansion. Turning to Slide 18, as we wrap up on today's call, I want to reiterate that Ingersoll Rand is in a solid position. We continue to deliver record results and both our long-term and 2024 guidance is reflective of our performance to date and our increasingly durable financial profile. To employees, I want to thank you again for another excellent finish to the year. We deliver strong results by demonstrating our commitment to meeting our financial targets and executing our economic growth engine through the use of IRX. Thank you for your hard work, resiliency, and focus actions. These results show the impact you each have as owners of the company. Our balance sheet is as strong as ever, and with our discipline and comprehensive capital allocation strategy, we remain resilient and have the capacity to deploy capital to investments with the highest return as we continue our track record of market performance. We remain nimble, continue to monitor the dynamic market conditions, and we're prepared for the challenges that may come. And with that, I'll turn the call back to the operator and open it for Q&A.

Your first question comes from Mike Halloran with Baird.

So let's start with where you ended there on the guidance piece. Certainly appreciate all the context and help and understand the relatively normal seasonality. But maybe you could just talk to what you're embedding from an underlying assumption perspective when it comes to the broader environment, broader end markets. Is this a year where you just see relatively sequential stability? Any specific pockets you're concerned about or where you see opportunities for acceleration? Less of an Ingersoll specific question meaning. I know you have a lot of drivers that you can use to goose growth relative to whatever the end markets are doing. More of just an end market specific in an environment question.

I can provide some insights on our performance by region. In America, we're experiencing improved momentum, with positive progress not only in the U.S. but also in Mexico and South America. Mainland Europe is stable; during my recent visit, I noted solid growth in certain areas, although overall it remains steady. The broader Middle East and India are also showing strong momentum, particularly in India, where we've made several investments, both inorganic and organic. In contrast, Asia Pacific is facing the most challenges, particularly in the first half of the year, largely due to tough comparisons from the previous year. We saw significant double-digit organic revenue growth in Asia Pacific during the first six months of 2023, primarily driven by China. Currently, China's market is not experiencing a boom, and while we are impacted by that, we are optimistic about outperforming the market, as our teams have demonstrated their capability even in 2023. That summarizes our regional outlook.

And then a follow-up on the Life Science side. The one area of PST that like a lot of the folks are seeing some headwinds here. You listened to what the bigger players in the industry are saying. There is more stability front half, improvement back half, I don't know, at least modest. Is that similar to what your expectations are from a recovery curve at this point?

That's kind of what we think too as well, Mike. Again, as you said, maybe bottoming out here as we kind of come into the first half and then seeing sequential improvement. I don't say, I mean, not in an exponential way, there is not that pent-up demand, but I would say in a very logical way to get back to the good growth that these end markets should continue to see over the long-term.

Your next question comes from Julian Mitchell with Barclays.

First off, just wanted to look at the sort of cadence through the year perhaps first off. Based on what you said, is it fair to assume sort of first quarter is about 21% of earnings for the year? And when we're looking at incremental margins, you call out that high 30s figure for the year. Is that fairly steady across both segments, as we move through 2024?

Yes, Julian, this is Vik. I will address the first part of your question, and Vicente will cover the margin aspect. Regarding the phasing, I believe you are generally in the right range. Another way to look at it is if you consider the phasing in line with the revenue and earnings delivery we experienced in 2023, I think you would have a good idea of our expectations for 2024.

Yes. I can take that. I mean, I think the way I think about that incremental margin, I mean, think about that 35% to 40% incremental margin. And when you look at the main buckets, I would say the first bucket of that improvement or good incremental margin comes from the initiatives that we always do, the I2V, price, very good continued growth momentum on the aftermarket, particularly the recurring revenues. The second bucket will be around the prior M&A improvement activities that we have always spoken about. The third bucket is, you probably saw on some of the appendix that we did some proactive restructuring at the end of 2023. This is kind of part of our continued to be proactive and nimble. And the last fourth bucket I would say in terms of this margin improvement is around corporate cost. You saw corporate cost going down roughly $13 million or so.

And just as we're starting out the year, looking at orders naturally, the sort of volatile quarter to quarter, reflecting what you said on a sort of a tough Asia environment in the first half of the year and sort of very tough orders comps. Do we think about orders being down perhaps in the first quarter year-on-year and then you pick up after that, as the comps and perhaps Asia get better?

Yes. We typically don't guide on the orders for the year or on a quarterly basis but we do definitely expect orders to be up sequentially from Q4 to Q1 on an absolute dollar perspective. The way we think about it too is that we typically book above one on a book to bill in the first half due typically to larger, longer cycle projects being booked and then projects being booked, and then below one in the second half, and we don't anticipate 2024 to be any different to that.

Your next question comes from Jeff Sprague with Vertical Research.

Vicente, can we just come back to Life Sciences for a moment, and just level set us here now after, kind of a couple tough years, what percent of PST is that business now and do you actually expect it to return to growth in 2024?

The Life Science business is roughly 25% to 30% of the PST segment today. I think as we think about going into the second half is when we expect that to be getting back to normal growth.

Thanks for the guidance on price versus volume. Just give a little bit of color on what you're expecting, just kind of the price cost equation, as we move through the year and maybe particularly in ITS.

Yes. Jeff, this is Vik. I'll take that one. I think simply stated here, I don't think you are going to see anything dramatically different than what you've seen historically. Meaning, we expect to generate approximately 2% price on a full-year basis. We would expect to be both dollar and margin positive from a price cost perspective each quarter of 2024. So again, nothing different in terms of that equation as we move to the year. Obviously, ITS being the bigger segment clearly that comment pertains to ITS as well as PST as well.

Your next question comes from Rob Wertheimer with Melius Research.

Actually, one more question on life science. I mean, we've seen you guys use demand generation and just IRX to outgrow tough markets in China, and maybe Europe last year. Has that been a factor in life science? Is there anything different in that market that constrains it? And then I wonder if you could just kind of compare market dynamics for you and life sciences to some of the other companies and industrials we've seen and the long drag. What does the recovery look like? Is there a bounce back? Has there been a decent. I mean, maybe just explain the sales dynamic there.

Yes, Rob, I'll say, life sciences and I think you were referring to particularly in China. I mean, they have seen similar declines, like the balance of the life science businesses and biopharma related markets. I would say for the balance of our China exposure, it isn't that much different than the impact we have seen on the ITS side with the one item of note to call out perhaps, is the SPX business that is more impacted by the water market. But that being said, I mean, we're excited about the prospect of SPX in China. And one example is that again, people tend to better end markets. So for example, the SPX took the same product and relaunched that to move away from the water market and move more into lithium battery production with a very unique proposition without having to reconfigure that product too much. I think we just continue to navigate that. I mean, basically, how do we continue to be agile and very nimble move from one end market to the other without having to reconstruct the product lines.

It was somewhat of a combination. So, has demand generation or other tools helped you overcome the decline in life sciences? And perhaps similarly to what Jeff asked, does the situation appear to show a recovery, or is it simply a return to normal growth? I'm not sure if destocking or other factors from your customers have caused below-normal sales, and whether you expect to bounce back in '25, or if you will just continue with normal growth. I'll stop there.

To the first question, absolutely, demand generation is really helping us tremendously because then think about it, I mean, our products can be applicable to pretty much any end market and we're being very selective and with demand generation, we can really reach this highly fragmented customer base in a very cost-effective way, very rapidly. And then, provide a better solution to our customers underneath, call it energy efficiency, water efficiency, and digitalization, all these thematics that we think are important. For the second question, the way we think about it is more normal. We don't expect this massive bounce back, if that happens, clearly, upside, but the way we like to view it is more normal.

Your next question comes from Andy Kaplowitz with Citigroup.

Vicente, I think you had an increase in your LOIs in Q4 to 10, I think from four last quarter. Are you seeing the M&A market open up a bit more? Is this more your team just finding more deals, and those couple of deals that you mentioned that are over a billion, do you see the larger deal market opening up or is it still difficult to get those larger ones over the finish line?

Yes, the M&A market is indeed opening up. To provide some context, the 10 transactions in the LOI are comparable in size and nature to the bolt-on deals we've pursued in recent years. Moreover, these 10 LOIs are sole source, meaning we've been actively communicating with the family involved and have established strong relationships. This situation is similar to our acquisition of Friulair, where we maintained contact with the founder, Luigi. Additionally, apart from these LOIs, we still have a couple of deals in the pipeline where the purchase price exceeds $1 billion. Although the timing is challenging, we have a few of those opportunities available. It’s also important to note that we chose to walk away from one of those billion-dollar transactions after extensive diligence over six to nine months, which highlights our commitment to prudence and discipline in our approach. Thus, we are maintaining a disciplined strategy in this environment and continue to see many promising opportunities.

And then can you give us more color in terms of the end markets? You answered the question before, but if I look at Americas and EMEA, pretty continued durable growth. Is it more the 20% of your business that's longer cycle larger compressors? Is it more of the short cycle stuff that's supporting your growth? And what do you think the sustainability of the two markets is?

We believe that in recent years, the focus has been more on the longer cycle. However, we now notice that as PMI improves, the shorter to medium cycle is gaining momentum, and we are already seeing signs of this. We discussed this, particularly regarding PST, where we mentioned the industrial shorter cycle is experiencing mid-single-digit growth year-over-year and also sequentially. Our teams remain agile, continuing to pursue energy efficiency in compressors, and we have a compelling narrative about significant energy savings, which is a strong theme in the market. The trend of reshoring remains robust, evident in countries like Mexico and South America. These themes have been consistent over the past couple of years.

Your next question comes from Nigel Coe with Wolfe Research.

All the big questions I think have been asked, but maybe just give us a bit of color on what you've seen in China looks like that was down in the quarter. Maybe just to quantify that and kind of like what's your sort of base case view on China? And then perhaps as part of that first half versus second half, it looks like core growth flat to 2% in the first half of the year and then we're going to lift the mid-single-digits in the back half of the year. Is that simply easier comps or are we seeing some acceleration, I don't know maybe in China or perhaps in life sciences? Any color there?

Yes. I was actually in China a few weeks ago, earlier here in January with the team and we were doing a pre-celebration of the Chinese New Year. But in addition to just reviewing how the business is performing and to keep that in mind, I mean, I think over the past six to nine months, I've been to China now three or four times. I think it's just one that we continue to stay really close to understand how our teams continue to control what we can control. From an orders perspective, yes, I mean China in the fourth quarter was down mid-single-digits, but keep in mind that this is on top of low double-digit orders growth that they saw in Q4 2022. Again, I think on a two-year stack, they still saw high single-digits order momentum, which is pretty impressive when you consider everything that is going on in China today. I would categorize the environment in China this time that I went to much better than what I saw in 2023, in the sense that there seems to be teams reenergized about maybe what's happening in terms of the stimulus and how the teams continue to leverage our technology into other end markets that they see some good pockets of growth. I was very encouraged to see how the team continues to navigate that difficult market by being very nimble and agile in terms of pivoting to those areas of good growth.

Yes Nigel on the second part of your question about the growth cadence in the first half versus the second half. Yes, probably a couple of factors I'd point to. One being, first and foremost, we do walk into the year with a still healthy backlog, including a good percentage of that that's longer cycle in nature. So that obviously gives us some good visibility into the back half of the year, when a lot of those projects tend to more naturally ship. And then yes, I do think there's a lot of truth in the statement you made about, clearly, comps gets a little bit more moderate in the back half of the year across the Board, but clearly whether it be China as well as the life sciences side of the equation on the PST business. So I think it's a couple of different factors. But again, like we said before, we think the phasing of delivery of revenue and earnings is actually very consistent in '24 versus what you've seen historically.

My follow-up question is, the strength in European compressor orders is remarkable considering what's going on in the economy there. If you had to rank order these three, Scope 1 emission targets, CO2 pricing and high energy prices, obviously, IRX on top of that, but if you have to rank those three, what would you say is the most important factor?

I would say high energy prices and Scope 1, which are kind of interrelated to one another. But yes, I'd say high energy prices, number one, Scope 1 in terms of targets that many of the companies have put out there, and then the third will be around the CO2.

Your next question comes from Joe Ritchie with Goldman Sachs.

The year looks promising overall. Incremental margins were impressive, and you achieved your margin targets two years early. Regarding the ITS business, I understand you have an incremental margin goal of 35 to 40 for the year. I'm curious about how much of that is dependent on volume at this stage. While I recognize that IRX focuses on continuous improvement, I'm interested in your capacity for ongoing margin growth if the volumes end up being lower than anticipated.

Joe, I would say that even when you consider our guidance, it clearly indicates lower growth while still generating good margins. This is driven by the efforts we've made in i2V, pricing, and aftermarket services. I believe these are three key initiatives that we have executed effectively. We've always mentioned that the ITS was ahead of schedule as part of the integration between Gardner Denver and IR, which prioritized these initiatives. Additionally, the PST team recently held a worldwide i2V event, and it was very encouraging to see our new leader effectively implementing this methodology in a segment that previously wasn't executed as we would have liked. Moreover, in the fourth quarter, we undertook some proactive restructuring at the end of the year to prudently protect the P&L. This approach allows us to manage what we can control and take necessary actions to ensure we achieve solid margin improvement.

Look, it sounds like you've been on the road slow trotting the last several weeks. I'm curious, just from a regulatory standpoint, are there any kind of changes in regulations that you guys are seeing across any particular region that might be impacting your business or could impact your business going forward in the next we'll call it next 12 to 24 months?

I mean, nothing that I would say of significant dramatic change that is new. I mean, we know about clearly the energy efficiency standards that are coming into effect by the federal government in the U.S., there's some refrigeration standards that will drive basically our air treatment business. I would say it in a positive way, driven first in Europe and then in the U.S. too as well. But those are kind of known that we have known for a little while, and but they're not new.

Your next question comes from Steve Volkmann with Jefferies.

Maybe just a couple of longer-term ones here. Just kind of going back to orders in backlog, now that the world is sort of normalizing again over some period, should we expect backlog to decline or do you think it's kind of at the rate that it should be going forward?

I'll categorize that. I mean, the good news is that clearly we're still at a pretty high backlog, which is encouraging to see. I think over time perhaps yes, it will get normalized. But again, I think when we think about the business that if we continue to get this book to build of one of approximately one that we continue to expect to see here in 2024, I think backlogs seem to be continuing at a pretty higher level than what we have done historically.

The other thing I would say there is, with the amount of, as they said with some of the longer cycle, we do fundamentally feel that compared to years in the past, there is just a higher amount of our backlog that's longer cycle projects, which then clearly leads to the level of backlog you have now. So I think that you have seen a little bit of a structural change in the composition of the backlog as compared to more historic times.

And then switching gears a little bit, companies that are acquisitive and sort of have this flywheel that you guys have occasionally something comes over the transom that isn't quite what you thought it was going to be? And you may have a little disappointment in some piece of some business or something? So I'm just curious, any lessons learned, anything like that happening? And more importantly, should we expect some level of divestitures to be kind of part of this machine as we go forward?

So you've seen us now since the merger done, we've done over 40 transactions and obviously not all of them have been a hundred percent the same. But what we would say here is, and we've acknowledged this before, probably the ones that maybe slightly below expectations comparatively speaking are probably the ones where IRX and that integration process probably didn't get embedded from day one, if not before. So if the lesson learned here is, we've got a playbook whether it's an ITS acquisition or a PST acquisition, we're going to continue to deploy that playbook on the IRX side because we fundamentally view that as the catalyst for success in terms of the integration and really embedding those businesses within the core.

Yes, I mean, the only thing that I'll add to that too as well is that, I think we said this before, but my staff meeting, which happens typically on Fridays, it's run as an IDM part of the IRX and one of the areas of focus is basically we have a dashboard of all the M&As as that are getting integrated, where we can clearly see if there's any issues or gaps. And that was an implementation that we did quite a few months ago, I would say 18 months ago as we saw maybe some businesses that were not properly integrated. So I think it's just part of that, as Vik said, continuous improvement, good evolution and having the news travel fast, so that we can react and course correct if something is not going the right way.

Your next question comes from Chris Snyder with UBS.

I wanted to also ask on the M&A engine and maybe a more high level one. So revenue in 2024 is going to be about 40% above 2021. Does that make it more difficult for the company to add this 400 to 500 basis points M&A contribution every year? And does it change anything around the process of doing so? Just as the numbers have, again, I guess gone 40% bigger versus three years ago to keep that same run rate.

Chris, I would say it has become more challenging. Back in 2021, we estimated our addressable market to be around $25 billion to $30 billion. However, during our most recent Investors Day, we presented an addressable market of $55 billion. Whenever we pursue an acquisition, we also consider the entrepreneur's perspective on whether we can expand the addressable market. By doing this in a highly fragmented market, we gain access to a larger pool of transactions to acquire. We remain mindful of the M&A engine's flywheel effect, ensuring it's a continuous mechanism for growth. We monitor the number of transactions and their probabilities as important data points, and our M&A cadence looks solid. While there haven't been any dramatic changes in our process, we continuously make adjustments and improvements. About a year ago, we mentioned that we analyze about 100 micro trends, which inform potential M&A opportunities. We're committed to evolving our process to enhance our operations continuously.

And then maybe just a follow-up on productivity and efficiency of the business. Obviously, margins have been really strong here the last three to four years. Do you feel like the efficiency of manufacturing has returned to pre-COVID levels? Obviously, there's a lot of disruption coming out of the pandemic, which I'm sure was a headwind to margins in some capacity. Do you feel like that is fully back at this point?

I don't think so. I believe there's still some supply chain disruption occurring here and there. For example, issues with the Red Sea and the Panama Canal contribute to these disruptions. As a global company that excels in assembly, any disruption in oil supply chains leads to inefficiencies in our factories. It's not back to the normal stability we experienced before COVID. That's my perspective. I also want to emphasize that we are focused on continuously improving our factories and operations, maintaining a lean mindset and a commitment to doing better than we did in the past.

Your next question comes from Joe O'Dea with Wells Fargo.

I wanted to just start on the growth algorithm and if we think about a couple of points of price and a point of volume and just how you're thinking about the overall macro and the type of growth that you have kind of underlying on the volume side. Really just trying to understand how much demand generation is embedded in this initial guide. Is that one point of volume reflective of outgrowth, or is there potential sort of upside on the demand generation side of things?

We believe there is potential for increased demand generation and volume. To elaborate, Vicente pointed out earlier that regional trends show America at the forefront, EMEA is relatively stable, and APAC, primarily China for us, is likely facing the most challenges as we start the year. This is the balanced perspective we used when considering our growth strategy. We began the year with a healthy and solid backlog. Demand generation is undoubtedly a key factor here and, similar to previous years, if there is an opportunity for growth within our guidance or for the year, it will likely be more related to organic volume as the year progresses. I don’t see this situation being very different from what you have seen historically. However, we are aware of and are monitoring some of the regional trends, especially as we enter the year, and we will keep an eye on these as we move through the quarter and into the second half of the year.

On ITS margins in the 30% in the fourth quarter, if you could kind of unpack that a little bit and bridging that sequential improvement from 3Q to 4Q. Also, just to clarify, it sounds like the 35% to 40% incrementals applies to both segments. It's not like that exit rate sets up a tough incremental comp. Not sure if any restructuring that sort of hit the ITS side or if that was more on the PST side, but just some details there would be helpful.

Yes, sure. Maybe I'll take those in pieces here. So if my memory serves correctly, it went from about 28.8% EBITDA margins to about 30%. So a little over a 100 basis points, sequential margin expansion from Q3 to Q4. I point to a couple of things here. One, frankly, as the revenue and volume levels tend to pace to the year, a lot of our productivity measures are tied to volume activity measures the i2V to follow, I'd say that's probably one of the single biggest drivers. I think price cost continues to remain quite positive and overall just strong solid execution as we exited the year. The other thing that I think we continue to see good what I'd say momentum on is the aftermarket side. That really sets up nicely even during the Investor Day. We indicated that the aftermarket as well as the whole recurring revenue side of the equation is a big focal point for us and we would expect to continue to see that not only ramp as we think about the next few years, but also that being margin accretive in the overall equation. Again, I think that's probably the way that we think about the equation in terms of what kind of drove Q4 specifically. Now in terms of the whole incrementals and how we think about 2024, like we said, 35% to 40% is the kind of overall average. The way I'd probably think about it here is, ITS is probably playing maybe towards the lower end of that, probably in the 30s realm. PST obviously probably has a little bit more outsized opportunity. But I think that also goes with the fact that we said, that while we're pleased with PST delivering 30% EBITDA margins in the full year of 2023, we know that that business can get up into that mid 30s realm. And as such, there should be a little bit more of an outpaced opportunity. So there's a little bit of puts and takes there as well as Vicente mentioned earlier, a little bit of upside on the corporate cost as we think year-over-year. So hopefully that kind of gives you a little bit of a sense of how we're thinking about the airplane itself out.

Your next question comes from Nathan Jones with Stifel.

A couple fairly narrow questions. I know one of the strategic additions you've made in M&A has been to add drying to the portfolio. So I was just hoping to get an update on the benefits that you're seeing there, revenue synergies that you're generating there, whether or not you think that portfolio is built out or it's still an opportunity to add more of that capability?

Yes, it's definitely a very exciting addition, and we have made several acquisitions in this area. We acquired Holtec a couple of years ago, along with Oxywise and Friulair, and even Hanye in China. The reason for these acquisitions is that air treatment is highly beneficial when attached to a compressor, with an expected attachment rate of about 70%. This is an important metric we focus on with our teams. For compressors, we assess how frequently air treatment is attached, as this drives significant growth momentum. Additionally, air treatment accounts for roughly 50% of our aftermarket business, generating solid aftermarket revenues. These two factors combined are very favorable. Furthermore, having compressors and air treatment work together enhances energy efficiency, allowing for better optimization through connectivity. Overall, we see this as a strategic growth opportunity for our dryer portfolio.

Your next question comes from David Raso with Evercore ISI.

Just a couple quick questions. A clarification on the M&A comment. I thought I heard the word incremental 400 to 500, but you already have 2% to 2.5% of acquired revenues booked that'll flow through this year. Was that truly 400 to 500 above what's already booked or just getting up to the framework of 400 to 500 basis points of acquired revenues? If you can just clarify that.

So I think, take them in pieces here. So you obviously have the carryover as well as the Friulair acquisition. So you see in our guidance be approximately $160 million of revenue contribution, that's the carryover and the completed to date, obviously we would expect to book to close more acquisitions as the year goes by. But embedded in the guide is that 160. The comment about 400 to 500 would be the acquisitions that we expect to make in the year and the annualized revenue contribution. So for all the deals that we expect to make here, based on the funnel and all the comments that Vicente made, we would expect that to be 400 to 500 basis points on an annualized basis. So you should take those kind of two statements separate from each other. But again, I think, the short answer here is we expect to continue to operate well in line with our stated economic growth engine and how you've seen us operate in years past.

And on the call out to that EV truck manufacturer in Europe on the vacuum and blower order weakness, you made a comment like I think prospects are improving potentially for that again. Just so I'm clear, do you think that order could come back on the books because it seemed to be of some size, must be $20 million, $30 million or so, not small? Is that something that can come back on the books?

Let me take the first part of that and I’ll let Vicente to answer. The way I would describe it is, interestingly enough, we de-booked it in Q4 of ‘23 and the original order happened to have come in Q4 of ‘22. So interestingly enough, it kind of hit us both ends, both in the quarter as well as the comp. Vicente, I'll let you speak to the prospects going forward.

And the prospect going forward is that, I mean we are still in touch with them. I mean, basically, they had a situation where the battery supplier went bankrupt, and that led to these truck manufacturing not being able to produce the trucks. This is needless to say what we're seeing now is that it's been acquired, the assets have been acquired and they have great technology. I mean, this is for the last-mile delivery trucks in Europe, which is very highly needed. And so the conversations continue to happen, which obviously means that there could be some good prospects here as we go into 2024.

Your last question comes from Nicole Deblase with Deutsche Bank.

Maybe just starting with the free cash question. So conversion of 100% all the CapEx plans. How are you guys thinking about working capital for 2024?

Sure. I believe there’s still an opportunity here. While we were encouraged by the positive momentum we saw heading into 2023, especially regarding inventory, which generated cash this quarter, we still find ourselves at high levels compared to the period before the supply chain issues. This presents a clear opportunity, along with the basics of managing operations, such as collections. It's fair to say that part of our portfolio, including the PST organization and some recent acquisitions, is not yet integrated into the shared service model, which is crucial for improving our working capital. When we combine all these factors, I think they represent a significant opportunity for 2024 and beyond.

It seems that there are no buybacks in the guidance based on the share count outlook. What is your perspective on potential buyback activity in 2024?

Yes, that's correct. We do not have any, I would say, incremental buybacks as part of the guidance. Now that being said, I think the way you should expect us to operate here in 2024 is similar to the prior years, meaning a requisite amount approximately. We've always said approximately $250 million is probably a good proxy and a placeholder in terms of expectations for the year. But you are correct that it's not formally in the guidance.

There are no further questions at this time. I will now turn the call back to Ingersoll Rand's CEO, Vicente Reynal for any closing remarks.

Thank you, Brian. And as we wrap up here, I just want to pass one more thank you to our employees who will continue to think and act like owners because they are owners of the company. And it's very exciting to see as I travel around the world, the high level of engagement and energy that we have across our organization. I think our economic growth engine is powered by that momentum on the ownership mindset and leveraging our IR. So again, very encouraged, very happy to see the performance and look forward to another great year here in 2024. Thank you.

This concludes today's conference call. You may now disconnect.